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Senate Judiciary Hearing on EB-5
On Wednesday, April 13, 2016, the Senate Judiciary Hearing held its second EB-5 hearing of the year, entitled, “The Distortion of EB-5 Targeted Employment Areas: Time to End the Abuse.” The hearing featured two panels. On the first panel were several House Members, including Bob Goodlatte (House Judiciary Committee Chairman), John Conyers (Ranking Member), and Congressman Mark Amodei. On the second panel, Peter Joseph, Executive Director of IIUSA, testified as a witness, amongst other private sector professionals in the industry.
Senator Chuck Grassley provided opening remarks to the hearing, expressing his belief that it was “just not right” that all EB-5 investments today were at the $500,000 level in Targeted Employment Areas (“TEAs”), despite Congress’ intent for most EB-5 investments to be made at the $1 million level. Senator Grassley expressed his belief that gerrymandering the boundaries of TEAs allows very affluent areas to benefit from the lower $500,000 investment threshold, thereby diminishing the incentive to invest in rural or distressed areas. Senator Patrick Leahy also pointed to the need for reform in the EB-5 Program, asserting that he would not “support mere window dressing.”
In the first panel, the resounding consensus was that although the EB-5 Program has promoted economic growth since its inception in 1990, there now exists an increasing need for reform. Chairman Goodlatte confirmed his support of the program, but expressed his belief that it had strayed further and further away from what Congress had initially envisioned and expected. Chairman Goodlatte encouraged projects to be located in distressed, as opposed to, affluent areas. His colleague, Ranking Member John Conyers, expressed his confidence that Congress will reform the EB-5 Program, pointing to a specific example of the Congressional District that he represents, which suffers from an unemployment rate of more than 300% the national average. He believed that although the district is slowly recovering, there are still many cities across the U.S. that have had a potential source of jobs diverted due to the manipulation of TEAs. Congressman Mark Amodei closed the panel by describing the EB-5 Program as akin to a car whose engine still runs pretty well, but is in need of a set of tires and a new paint job. He encouraged his colleagues to look at the lessons from the past 25 years to find a path forward, cautioning that piecemeal extensions lead to uncertainty and unpredictability.
In the second panel, IIUSA Executive Director, Peter Joseph, explained that EB-5 regulations give states discretion on how TEA boundaries are drawn, but it is ultimately USCIS that retains the authority to assess the data and methodology that is used, denying a state’s TEA determination if it finds the data or methodology is flawed. Other members of the panel expressed their support in reforming the EB-5 Program and provided various suggestions for potential TEA reform including: tightening poverty, income and unemployment criteria; raising the standard and TEA investment amount to $725,000 and $675,000 , respectively; reserving a minimum of 20% of the annual available visas for investors who make investments in rural areas; using additional economic distress criteria for TEA designation and requiring each census tract in a TEA to meet the criteria; incentivizing projects built in true distressed areas; and having Congress test its TEA approach to existing or completed large-scale real estate projects in major urban areas that have utilized EB-5 capital as part of the capital stack, once it has been determined.
SEC Files Complaint on EB-5
On April 14, 2016, one day after the Senate Judiciary Hearing, the Securities and Exchange Commission (“SEC”) filed a civil lawsuit in federal court, alleging a “massive eight-year fraudulent scheme” and an asset freeze against a ski resort in Vermont that solicited investments through the EB-5 Program. Although further details relating to this lawsuit has yet to be released, the State of Vermont has set up a website dedicated to informing interested parties regarding the lawsuit and containing publicly available filings for the case.
Although the EB-5 Program has been temporarily extended until September 30, 2016, the recent hearing and SEC complaint confirms that changes to the Program are imminent. Only time can tell when and what types of changes to the Program will be enforced. In the meantime, we will continue to keep everyone apprised of the newest developments.
Learn more about Mitch Wexler.